2007May Housing Weaker - Americans Spending

2007May Housing Weaker - Americans Spending

Every day, we are bombarded by information from the newspaper, the Internet, CNN, and even our coworkers around the water cooler. Contrary to conventional wisdom, more information is not always better information. In fact, we often get distracted by the “noise” out there and miss the true underlying trends that matter.

The Economist quotes Robert Toll, CEO of the homebuilding company Toll Brothers as saying “Boston is still in the pits…in Florida it’s like death takes a holiday…Las Vegas is now terrible…Michigan may be in a situation where it doesn’t come back.”

Mr. Toll is speaking of the housing market, of course, and the statistics support his rather colorful claims. According to the National Association of Homebuilders, existing home sales fell by 8.4% in March, the biggest drop in 18 years. Median prices also fell slightly and will likely fall much further as inventories continue to rise. All of this hits the press just weeks after the “sub-prime lending disaster” filled the airwaves and the business sections of the country’s newspapers.

It appears that every month there is a new “crisis” that will wreck the economy, yet none of them ever seem to be as bad as predicted once the dust settles. So what gives? Is all of the talk about the housing crash just noise? Well, not exactly.

A home is still the biggest single asset for most families, so homeowners clearly have an interest in the health of the housing market. But fluctuations in the prices of homes do not drive the economy; consumer spending does. While a housing bust might make Americans feel poorer, it has very little affect on their actual behavior. Americans jealously guard their standards of living, and they always seem to find a way to pay for that new TV or summer camp for the kids. Short-term blips in the economy are an annoyance, but life goes on in the real world. For the woes of the housing market to have a strong impact on consumers, it would have to cause widespread job losses. With the unemployment rate of the country at historical lows, this is obviously not the case.

The 2000-2002 bear market was one of the worst in the history of the stock market, and the damage done was in the trillions of dollars. September 11, 2001, was the worst terrorist attack in history. Both of these events stung, but consumers continued to spend money and the economy continued to grow. It appears that this bear market in housing will be no different.

Remember, we still have an increasing number of Boomer households with kids still at home. As long as their kids are at home or in school and dependent on Boomer parents, the parents will spend what they have to so their offspring leave the nest as successfully as possible. Once the kids are on their own, Mom and Dad will change their spending into debt reduction and retirement saving. Therein we find the catalyst for the next economic contraction.